Bill Gale makes the case for fundamental tax reform in the Brookings interview above, consistent with my “top two” list of reasons for tax reform I discussed in this past weekend’s CNN special on “IOUSA Solutions.” From the CNN transcript (emphasis added):

ROGERS: There are two questions. One is, are we raising enough revenue to cover our bills? Right now it’s obvious we are not. We don’t have a sustainable federal tax system.

A separate question is once you decide what the right level of revenue is, how do you raise it? There is nothing [that] says we have to stick with any combination of the Bush tax cuts, in fact, current law says they are going away at the end of this year.

So Congress and the administration are going to have to decide what they want to do. Do they want to continue Bush tax policy or replace it with something new?

I happen to think that the Obama Administration can come up with something better than just “Bush tax policy extended”–especially given how much they’ve complained about the poor quality of Bush tax policy over the years. It is obvious that tax reform is needed both for deficit reduction and for the sake of tax policy itself, even if we didn’t have to raise more revenue. I can’t imagine the President’s fiscal commission coming back to the President in December and telling him: “gee, Mr. President, it turns out you’re right…Extending the Bush tax cuts and making up for lost revenue by raising tax rates only on the rich is a good idea.”

6 Responses to “Top Two Reasons Why We Need Fundamental Tax Reform”

One relatively small part of the problem is bipartisan agreement that all tax changes must increase progressivity. As California has learned, the price of high progressivity is high volatility in revenue. That volatility makes the government safety net unreliable, forced to shrink when it’s most needed.

Why not adopt a federal VAT, but mostly eliminate a federal income tax over a 10-yr. transition period (probably with constitutional amendment). Reserve the income tax for the states.

VAT is broad-based and harder to play games targeting lobbying constituencies. Reserve federal programs for Medicare, social security, defense, and police and judicial powers. Set VAT rate high enough to eventually balance the budget.

Send agriculture, education, housing, transportation, and other programs that don’t have a federal rationale to the states where they actually balance their budgets most of the time. Give states the power to play progressivity games with the income tax.

There seems to be some mistaken impression that those who have money in this country somehow inherited it and do not do a days work. The truth is that most of those who are “rich” had the smarts and get up and go to succeed. Why does the government seek to penalize them just because they worked hard? We do not mind paying our fair share, but it really frosts me to be taken advantage of. The picture of us being idle rich who can afford to pay everyone elses bills is neither just nor right. What ever happened to the across the board tax rate for everyone?

A VAT would be a good idea if it replace (not supplement) federal taxes. It will never replace the federal taxes though because it will not allow the politicians to manipulate society nor buy votes by reducing taxes on one group and increasing it on another group. If VAT is every passed it should be a line item on the receipt and listed as a percentage of the total. Even if the VAT became the only form of federal taxes leaving income taxes to the states the states will still keep the sale tax. Now just think what the population is going to do when they buy a $100 dollar item and there is a 20% VAT and another 10% state tax for a total of a $130 to $132 depending if the state taxes the VAT. The states will tax the VAT because it will be hidden in the price of the item.